Misconceptions About Role of Big Money in the Initiative Process Also Challenged

SAN FRANCISCO, California, September 22, 1998--A set of new studies released today by the Public Policy Institute of California shed some unexpected and unconventional light on California's often criticized initiative process. In particular, three major reports from PPIC's governance and public finance program find that a number of charges leveled at Proposition 13--unquestionably the most controversial fiscal initiative ever passed by California voters--may be more a function of perception than reality.

"Twenty years after its passage, Proposition 13 still ignites passions on both sides of the debate, and there is little agreement about its effects, intended or unintended," said PPIC President and CEO David Lyon. "Now, we have some significant facts to lay on the table. However, the broad question of Prop. 13's legacy remains unanswered. The complexity and importance of this initiative and its progeny demand further investigation before a final judgement is made."

Passed overwhelmingly by frustrated California voters in June 1978, Proposition 13 constrained the ability of local governments to raise revenues by requiring a supermajority vote on tax measures, rolling back property tax assessments to 1975 levels, limiting the property tax rate to one percent, and restricting the growth of property tax increases to two percent annually. A PPIC survey conducted this month by senior fellow Mark Baldassare found Californians still largely favor most aspects of the initiative. Thirty- eight percent said that property tax limitations imposed by Prop. 13 have had a good effect on local government services, compared with 23 percent who thought the effect had been negative. And the majority continue to support requiring a supermajority vote to ratify local taxes: 58 percent said they would oppose allowing local special taxes to pass with a simple majority rather than a two-thirds vote.

Local Government: It's Less Fragmented Than National Average

Given Prop. 13's design, critics argued early on that California's system of local government would become increasingly complex and fragmented. Some claimed that both cities and special district governments would proliferate in number: Cities, because residents could now form these governments and capture local control of revenues without increasing their property tax bills; special districts, because cash-strapped policymakers could use these entities for their ability to issue debt or levy fees and service charges.

In his study, Deep Roots: Local Government Structure in California, research fellow Paul Lewis tested the conventional wisdom that Prop. 13 led to the widespread creation of new local jurisdictions. He found that although the initiative played havoc with many local governments' finances, it did not alter the state's overall local government structure. In fact, Lewis discovered that California's public sector is less fragmented than the national average. The growth rate in the number of new cities has slowed since the 1960's. Evidence also indicates that the overall number of special districts has increased only gradually since the 1970's, and to a large extent, the creation of new special districts has been offset by the abolition of others.

Tax Burden: It's Lower Now Than in 1978

Researchers Michael Shires, John Ellwood, and Mary Sprague sought to answer a related, and highly prominent, question in the ongoing debate: Are citizens paying more today in taxes and other public fees and charges than they were in the years preceding Prop. 13? Their study, Has Proposition 13 Delivered: The Changing Tax Burden in California, revealed that Prop. 13 has contributed to a rollback in the tax burden. Controlling for inflation, state and local government revenues per person have declined 16 percent since 1978. Using another measure, the tax burden as a share of personal income dropped from 15 percent in 1978 to 12.5 percent in 1995. However, the authors show that while the tax burden is lower than it was twenty years ago, it has risen significantly since 1981 when Prop. 13 was fully implemented.

While it is true that the tax burden has fallen in California, the public remains concerned about the growth of taxes, fees, and other special charges and continues to support efforts to reign in state and local government. What is fueling the perception that the tax burden is still out of control? Shires, Ellwood, and Sprague point to one possible explanation: Taxpayers and voters are far more likely to think in terms of current dollars than inflation-adjusted dollars. With no adjustment for inflation or relative income, Californians paid twice as much for government in 1995 as they did in 1978.

Property Tax Inequity: A Declining Problem for Properties Sold After 1980

Despite their general approval of Prop. 13, a majority of California residents (59 percent, PPIC Statewide Survey) oppose one key feature of the initiative. Under Prop. 13, local government cannot increase the property taxes on a home by more than 2 percent annually until that home is resold. Since housing prices have increased substantially over the past two decades, long-term homeowners often pay much less in property taxes than recent homebuyers in the same neighborhood.

In their study, Proposition 13 in Recession and Recovery, researchers Steven Sheffrin and Terri Sexton examine this inequity in Los Angeles and San Mateo Counties. They found that homes with a base year of 1975 (that is, homes that had not been sold since 1978) are the largest single source of property tax discrepancies. They also found that the fraction of 1975 base-year property has decreased substantially over time, mainly due to new construction and properties being sold and reassessed.

While critics of the initiative and Californians in general correctly perceive a disparity in the system, Sheffrin and Sexton point out that the disparity between market and assessed values for properties sold after 1980 is not that different from the disparity in many other states that do not have Prop. 13-type limitations. In other words, the inequity of the property tax system is not unique to California and has become less serious in the case of properties that were sold and reassessed after 1980.

Initiative Process: Money Doesn't Buy Success at Ballot Box

Generally, many observers of California's initiative scheme have concluded that the process has been captured by wealthy special interests. Citizen initiatives like Prop. 13 are increasingly threatened, they argue, in an era when vast sums of money are spent by economic powers--such as tobacco interests or the insurance industry--to influence outcomes at the ballot box. However, in her report, Interest Group Influence in the California Initiative Process, researcher Elisabeth Gerber finds just the opposite to be true. Not only do economic groups lack the unbridled influence commonly claimed by critics of this form of legislation, the vast sums of money these groups pour into special interest campaigns may even be self-defeating, suggesting to voters that the proposed legislation is unlikely to be in their own interest.

Overall, Gerber found that economic interests are less successful than citizen groups in passing initiatives. They devote few of their resources to support initiatives, and the initiatives they do support rarely pass. Gerber's analysis of 31 ballot measures between 1988 and 1990 revealed that only 22 percent of initiatives backed by economic groups passed, in contrast to a 60 percent success rate for citizen-supported ballot measures. Gerber concludes that citizen groups, which often deal with social issues that involve strong emotional appeal and which rely on a coalition of support from many diverse interests, have a comparative advantage in mobilizing people, making it relatively easier for them to pass ballot measures. Both citizen and economic groups are moderately successful in blocking initiatives. Economic interests, which vastly outspend citizen groups, devote the bulk of their resources--about 78 percent-- to defeating initiatives rather than supporting them.

"These studies are part of an ongoing effort at PPIC to understand California's experience with the initiative process and the consequences of using direct democracy to limit representative government," added Lyon. "There's more to come. Specifically, we hope to address one of the key consequences of Prop. 13: The ongoing tension between the authority of the state government to allocate property taxes and the responsibility of local governments to deliver services."

The Public Policy Institute of California is an independent, nonprofit organization dedicated to nonpartisan research on economic, social, and political issues that affect the lives of Californians.